I have been invited to moderate a customer panel on next-gen BPO at the Cognizant Community event next week. The theme of the conference is “The Future of Work”. When I look at the wide range of industries represented on the panel, the economic models behind today’s BPO, the technologies which are influencing every business process, it is a good time to revisit Dr.Michael Hammer’s seminal 1990 Harvard Business Review article .

The article spawned a wave of process reengineering, process benchmarking, shared service consolidations and first wave BPO in the 90s. Unfortunately, way too many companies ignored the “don’t automate” part of his message and there was also plenty of wasted dollars around ERP, Y2K, ebiz projects which they are paying for even today. (To be fair, he sent mixed messages by aligning with SAP and Deloitte – their “do automate” messages were fairly loud).

Twenty years later, we find every company under pressure to redo technology and older forms of outsourcing. The consumerization decade is exposing how poorly in contrast enterprise technology has performed. As Cognizant executives like to say “After Sunday night with home based technologies, it is quite a let down to go in to work technologies on Monday morning.”

The challenging economy and rapidly shifting industry lines are forcing companies to evaluate what is “core” and what is “context” (to use Geoffrey Moore’s terms) – shows in the panel that vertical process BPO is growing much faster than traditional horizontal BPO. Clouds and SaaS business models are allowing companies to look for BPO and other outsourcing which is much more variable and results based.

And technology is allowing us to rethink just about every process. RFID and other tags are redefining asset management processes. Social networks are reshaping CRM processes. QR codes are redefining expense tracking. As companies introduce “smart products” for their industries they are having to factor support for embedded technology in their R&D, customer support and product management processes.

I dare say if Dr. Hammer was still alive today, he would agree the time is right for plenty of process obliteration and plenty of process automation.

“Cloud BPO” is, simply put, really a load of nonsense in today’s environment. The core fulcrum processes of BPO are the toughest to move into the Cloud, and only the small-to-medium business sector is going to enjoy any modicum of success of moving genuine “BPO” processes, such as finance and HR, into the Cloud in the near-term. And this is mainly with very standardized and straightforward Internet-hosted apps (i.e. simple interface, no integration requirements), as opposed to genuine Cloud-enabled ERP apps that leverage IaaS/PaaS/SaaS architecture.”

It’s not Phil’s intention, but basically he just wrote a brochure for incumbent on-premise apps software vendors, hosting firms, systems integrators who focus on release upgrade projects and offshore apps management. Those four categories of spend cost most companies upwards of $ 1,000 a user a month. If that cannot be lowered to the sub-$ 100 benchmark using cloud solutions, any labor arbitrage from BPO tasks is trivial.

“My view is BPO, particularly horizontal process BPO (finance, HR, procurement etc) is due for a major upheaval. The vision for BPO has always been to optimize the transactional metric end point – price per check, price per invoice etc. Somewhere along the way the industry accepted the albatross called “and do it with my existing system”. When I go to a restaurant, I don’t take my Weber grill along and insist the restaurant use that. I go there expecting industrial scale food equipment, economies of scale in their food and other procurement and for the finished product to be as advertised - wholesome, well priced, well served etc. But we have burdened BPO with existing Oracle or SAP’s annual maintenance, and all the associated hosting, application management, upgrade cost.”

So, if not clouds, BPO providers need to propose other cheaper on-premise solutions – even their own. For too long they have told customers “we can work with what you have” and hurt their own value proposition.

The Nasscom Leadership Forum, an annual fixture in Mumbai is on this week. It exudes a bullish tone after a subdued one the last couple of years. But while there is plenty of talk of innovation at the event, the reality is an “old faithful” benefactor through the two decades the event has been held, the financial services industry is back spending again.

Barry Wiegler, who used to run the Sourcing Interest Group and is now Managing Director of Outsourcing Angels recently interviewed me about outsourcing innovation and a couple of comments I made to him are particularly relevant as Nasscom looks ahead to the next two decades

“The big challenge for a number of outsourcers (and their investors) is they keep wanting to sell services that were innovative a decade ago. Many are centered around ERP vendors, Cold-war era data centers and waterfall implementation methodologies in a world increasingly moving to social CRM, cloud computing and agile methods.”

“…newer players like Salesforce.com and Amazon. They are not “traditional outsourcers” but they are giving customers alternatives as they look at application management and IT infrastructure services. They emphasize automation more than labor in their services, and represent a major threat to the current outsourcing model which is pretty labor intensive.”

““If you look at the last couple of decades, most outsourcing has focused on infotech – software, data centers etc. There are similar new opportunities opening up as companies implement cleantech, nanotech etc.”

Couple of years ago I would have been shocked at the announcements of today, today it merely deserved a tweet of a “wow” but little additional surprise.

You see I already profiled Ray Lane in my book for having made the transition from infotech at Oracle to cleantech at Kleiner Perkins

“The discovery process has made Lane a walking encyclopedia on fuels. He can rattle off ethanol yield from sugarcane versus that from corn and other biofuels. He can compare fuel technology innovations in Germany, Brazil, and Israel. It’s a far cry from the cash flow metrics and global operations he managed at Oracle.”

With his software and services history (Booz, EDS, decent sized Oracle Consulting) he also brings some of that perspective to HP. And if you buy into the trends I profile in my book on how GE, BASF and so many others are marrying infotech, cleantech, biotech, healthtech etc, HP could use his guidance well beyond its own current infotech focus.

Leo – let me start by complimenting him by saying that if he had been there a month ago I would not have dared used the word wimp anywhere near HP :) We had a couple of throat clearing meetings while he was at SAP.

While Leo does not have the diverse technology background Ray does, he makes up for it in his global reach. Last time we exchanged notes on countries visited he had me beat by 40 countries and I have been to a few myself. A definite Polymath in the geographic dimension.

So, HP is getting a nice two-fer package.

Of course, the gossip columns will get plenty of sideline stories (Leo will try to acquire SAP, Ray would love to tangle with Oracle etc, whatever). I think more of customers and I hope Leo learned from the last few years at SAP. I think he focused too much on Oracle and his bigger SI friends, and not enough on cannibalizing them with BYD and other disruptive technologies. He will be tempted to similarly focus on IBM, Apple, Oracle, Cisco, CA, Accenture and TCS at HP when the disruptions are coming from Cartridge World, salesforce.com, Cognizant and amazon among others. In many ways HP’s core ink , software and services products are far more vulnerable than SAP’s software products were. I always thought Mark Hurd was given way more credit than he deserved for leaving HP vulnerable in those markets.

Enough analysis – here’s a cordial congratulations. Look forward to some more throat clearing sessions down the road!

SaaS vendor/Cloud Outsourcer/Nextgen SI like appirio would likely be a factor of 25

At its partner meeting this week, NetSuite announced a BPO relationship with Genpact and a systems integration/application management relationship with Wipro

This move to Scenario 3 is great news for the market. Of course, SAP, Oracle and other on-premise ERP customers looking at BPO will have to objectively evaluate the NetSuite solution, not just insist Genpact take over the current environment. Given a fair chance for most customers it should be a no-brainer even after transition costs to justify the move to NetSuite.

Both Genpact and Wipro will need to watch their larger SAP/Oracle/other on-premise ERP practices from stalling this new initiative. It’s their version of the “innovator’s dilemma” – incumbent cash cows invariably feel threatened by new initiatives.

The two service providers will also need to keep optimizing their own practices – and evolving their own delivery to Scenario 4 before a set of hungry new SIs does.

Tiger Tyagarajan, COO of Genpact, George A. Price Jr. sell-side analyst covering services at Stifel Nicolaus and I had a lively debate which brought out the tension someone like Tiger feels between delivering to “value” expectations of a financial analyst like George and the “value” clients expect based on advice from buyer advocates like me.

My view is BPO, particularly horizontal process BPO (finance, HR, procurement etc) is due for a major upheaval. The vision for BPO has always been to optimize the transactional metric end point – price per check, price per invoice etc. Somewhere along the way the industry accepted the albatross called “and do it with my existing system”. When I go to a restaurant, I don’t take my Weber grill along and insist the restaurant use that. I go there expecting industrial scale food equipment, economies of scale in their food and other procurement and for the finished product to be as advertised - wholesome, well priced, well served etc. But we have burdened BPO with existing Oracle or SAP’s annual maintenance, and all the associated hosting, application management, upgrade cost.

Does it matter how my payroll check or AP invoice gets processed so long as the cost, quality etc are attractive? To twist Larry Ellison’s words does the check have to smell of Chanel's latest or be in its shade of fuchsia or puce?

I talked to a few BPO providers after the session and the questions were what would you do? I would leverage the data center processing and storage efficiencies coming out of clouds. I would learn to leverage massively shared application management services and 5 minute upgrades coming out of SaaS world. Either partner with them or build your own. If the client insists on bringing their Weber grill in show them your industrial scale grill. Easier said than done – many customers are unwilling to write off their massive ERP investment and pay early termination fees to get out of bad hosting and AM contracts. Others will use their auditors as the reason – they have already validated our existing system.

Well, show them the financial analysis. In most cases you should be able to reduce the cost of the technology by 5X, if not 10X. Most reasonable business people will find that attractive. But you have to step up and show you can do it, not just keep supporting the status quo path.

And if the client still insists on continuing with the legacy technology, please don’t call it BPO. Call it what it is - Business Task Outsourcing. You are touching a very small part of the business process – and frankly opening the door for someone disruptive to come along and optimize the entire process at the fraction of the cost.

BTW – Alan Alper at Cognizant recorded some more emerging BPO trends in this video with Ramesh Ramani, who leads Cognizant’s BPO efforts for the bank and financial services vertical and me.

3 years ago, Chandran Sankaran wrote a “Real Deal” guest blog on next-gen BPO when he started Zyme Solutions. It is good to see he has been executing on his vision and that IIM Bangalore, a reputed business school, has written a case study on his business model.

I extracted a few of Chandran’s comments from that document which focuses on non-linear ( not tied to chargeable hours) growth in services - the document can be ordered by emailing : dvrs AT iimb.ernet.in

“As we have seen from the explosion of outsourcing, there is a lot of work to be found in this model, but it comes at a price—the need to constantly hire and train ever-larger workforces, and the need to combat rising costs and increasing commoditization and price pressure at the customer interface. Down this path, once you have hired 10,000 people, you now need to keep that machine fed—which means you must find any work you can to feed the machine.

It is really hard for such a company to transform itself from a linear, people driven business to one that isn’t. Of course it can be done, but it will take sustained, visionary leadership from the top against all sorts of near-term growth pressure to pull it off.

We started Zyme at a different stage in the services industry life cycle. We saw the writing on the wall for the traditional services business models, and we had the luxury of making different choices from a clean slate. Early in Zyme’s life, I wrote a piece in a blog that laid out some of these choices. We have stuck with that vision. We have become a specialist with a non-linear, platform based, business model, and we chose a big market and problem area where we have the opportunity to build a large company over time.”

This continues a series of guest columns from practitioners and bloggers I respect. The category – The Real Deal – describes them well.

This time it is Karen Watts who is President and Founder of Corefino. CFOs have long nudged even pushed their peers in manufacturing, HR, IT, other domains to outsource but have tended to keep their own operations in-house. Karen asks why?

“They say the definition of insanity is doing something over and over again and expecting a different outcome, yet that’s exactly what happens year after year within the CFO community when it comes to running our accounting departments. I know, because until Corefino, I spent my entire career as a CFO and, like the rest of my financial executive brethren, was an all-too-willing participant in perpetuating what might be called “OFF” -- On-site Financial follies!

It works something like this: most CFO’s come up through the financial department rank and file as accountants, financial analysts, etc. and are used to collaborating and being surrounded by “the pack.” As we work our way up the management chain to controller and CFO, we draw comfort from cube after cube of head-down workers tirelessly crunching numbers, re-checking compliances and performing “routine financials.”

But here’s the wrinkle: three things changed that turned even the most conscientious, intelligent CFOs into anything BUT strategic:

· Technology Complexity – Accounting systems are now packaged within or integrated with multiple enterprise application source systems. These primarily on-site deployed systems are expensive to install, even more difficult to learn, and absolutely are impossible to change easily without additional cost and disruption;

· Workforce Complexity –Today, your most efficient accounting new hire is (at best) trained on one or two enterprise applications, which lasts only until the next version/ release. Those on-site employees need to be repeatedly trained at significant cost and time disruption. And, companies can no longer react quickly and easily to bad quarters by immediately excising redundant personnel based on current HR laws.

· Accounting Compliance Complexity -- Multi-national, multi-division, multi-currency accounting is no longer the exception, it’s the rule. Sprinkle in a good measure of changing local, state and national tax changes, a dash or two of changeable accounting rules and you’ve got a recipe for disaster if you aren’t up on every new edict. And that’s not even factoring in massive sweeping accounting changes – like the cut-over from GAAP to IFRS, or the growing proposed array of “green” laws carrying financial/accounting implications.

The once comfortable CFO paradigm of on-site technology and on-site accountants works now only under this scenario: if CFOs willingly enslave ourselves to the tactical, versus the impactful. The multiple millions of dollars that mid-market and larger firms spend on deploying and keeping their financial solutions current make the CFO accountable to ensuring these millions are spent right: picking the right vendor, involving themselves in key technology deployment decisions, etc. The people training factor makes it worse. That pulls us off (yes OFF – Onsite Financial Follies) of the strategic financial activist job, and makes us technology/people babysitters. And yet we doggedly repeat this on-premise model and expect a different outcome. That’s insanity!

I founded Corefino (out of desperation!) to provide an integratable, Best- in-Class solution for the “Strategic CFO.” It has three pieces: a People-Place-Platform paradigm.

First, I leveraged what hasn’t existed previously – the newest genre of sophisticated software-as-a-service (SaaS) financial solutions (like Salesforce.com-architected CODA 2go and Intacct). This removes the technology headache of performing a routine financial function on site – the same way that ADP perfected the routine payroll function.

Next, I focused on the people issue. Corefino’s business process outsourcing (BPO) model is second to none: a highly skilled, scalable team of off-site accounting experts, each selected for their skill in a particular expertise, each process passing from one expert to the next.

Finally, I spent three years building the Corefino Triple-C Platform™ …a three-part Connect-Correct-Comply vetted framework of more than 500 Best Practices and business process workflows. It’s patented, one-of-a-kind, and constantly updated. CFOs (and others) have 24x7 anywhere/anytime access via a convenient Web-Based portal.

All three of these pieces are available on a monthly, subscription-based model that saves most companies between 25-40% immediately.

All of us need to look no further than financial press pages to know that the CFOs role in business is evolving and under assault. One headlined blue chip firm in the financial sector just announced that it’s hired its third CFO in as many years. CFO magazine runs the CFO “Churn-o-Meter.” It’s time we start doing something different with our time/focus; it’s time we exit the technology/people babysitting and leave it to others.”

The market has been growing nicely but a shockingly low = 4% set of customers are looking at cheaper applications as they move to BPO.

Phil laments “unless customers think beyond short-term labor arbitrage, and service providers introduce significant process and technology enhancements to the early adopters to help them optimize their delivery. This "lift and shift" model could well result in customers losing more than they save.”

I agree – but I don’t just blame customers. The major BPO players – Western and Indian - are content to leverage existing software vendors like SAP, Oracle, Ariba etc. They have shown little imagination (or investment) in building their own process automation engines, or leveraging newer, and lot cheaper SaaS offerings – as I wrote here about the recent Wipro-Oracle BPO plans.

So “lift and shift” the labor, but often continue with “daft” processes and with software which at its high maintenance and upkeep is best described as “shaft”

“VARs are going to have to change their business model or go out of business. They have a math problem they need to solve. Great Plains has licence up front of $529k. Then the VAR gets one to three times as much to implement, so that’s up to $1.59 million. NetSuite you pay $176k subscription per year. If I charge you that, can I charge you $1.59 million for services? No way. So the challenge for VARs becomes how I reduce the cost by 10x.”

His suggestion – like appirio – deliver more condensed and highly leveragable services as software. (Update: Zach reminded me NetSuite has been using the term "service as software" for a while now)

BTW – he does not touch on BPO, but that market is ripe for a huge re-think also as I wrote here